Bank lifetime annuity at 3%: 33 years to recoup €40,000

Lifetime annuity at 3%: 33 years to recover €40,000

Forty thousand euros yielding 3% a year take 33 years and four months to return the initial capital. That is the elementary arithmetic behind the guaranteed lifetime annuity that Spanish banks are selling to clients with share portfolios inherited or built up over the years: the amount is transferred, the bank pays an annual coupon and, when the holder dies, the principal —or whatever is left of it— passes to the heirs. The promise sounds like a tax bargain. The problem is that nobody gives away 3%.

What a guaranteed lifetime annuity is and why the 3% is misleading

The real hook of the product is not the interest rate, but the tax treatment. Anyone holding shares with latent capital gains who sells them pays Spanish income tax (IRPF) on the gain. Transferring them into a guaranteed lifetime annuity supposedly avoids that hit and lets the heirs receive the capital with minimal tax burden. It is the part the holder ends up confirming: the capital gains are not taxed and the children would pay hardly anything when splitting the €40,000.

That is where the good news ends. The advertised rate is gross and, with fees and coupon withholding, it works out at a net 2% at best. And that 2% is not free either: the money stops being liquid. Touching it early comes at a cost.

The questions the salesperson never puts in writing

A 2% has to compete with what is out there, and the comparison does not favour it. Short-term Spanish Treasury bills pay more. Ultra-short-duration bond money market funds do too. And a simple interest-bearing savings account comes close to that return with no strings attached, with total freedom to withdraw the money any day.

The detail that is usually omitted is uncomfortable: if the holder dies the day after signing, do the heirs receive the full €40,000? And what if they die when the sum of coupons already exceeds the principal contributed? That scenario leaves the beneficiaries collecting less than what was handed over. The detailed breakdown of those three questions —guaranteed capital, accumulated income and remainder— is precisely the one no salesperson eagerly provides.

Alternatives on the table: from Germany's 4.2% to an equity-linked bond

Outside the bank, competitive offers do exist. Platforms with interest-bearing accounts in Germany advertise 4.2% a year for the first few months, with monthly payouts and immediate availability, before dropping to 2.8%. There are equity-linked products with returns above 10%, although with the stock market down 40% that return is cut in half. And the plain sovereign bond remains the benchmark.

The rule that keeps repeating makes sense: if the institution offers A, it is worth looking at B. The bank's interests and the client's are opposed, and whoever sells the product earns from that very product.

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Is it worth locking up €40,000 for three decades to save a tax bill today, or does the opportunity cost eat the savings before retirement?